The worse problem with being a tax preparer is that I don’t hear about an issue until the client comes in to get their taxes done. That’s when they tell me about the 401K distribution, starting social security, a new business or hiring an employee. Too often, I’m told that the business paid $XXX in labor costs. No 1099MISC was issued and serious questions if those paid are really employees not contract labor. Then I have to clean up the mess.
A major issue with the IRS is the classification of an employee as an independent contractor. For the business owner, an independent contractor is easier. There is no withholding, only one form to file at the end of the year and the costs are lower. For the employee, being an independent contractor is great on payday but a killer at the end of the year when you have to pay self employment taxes and have no withholding. Big tax bills with no way to pay it off. No wonder the IRS is concerned.
When it comes to the employee vs. independent contractor issue, the IRS looks at the control the employer has over the worker. Someone hires me to do their bookkeeping as an independent contractor. We have an agreement about what work will be done but I do it at my office on my timetable. They have no control over my work procedures as long as I get the work done when they need it. At the other end of the scale, is the receptionist I hire during tax season. She has very little control over the job. I set the times she works and provide her with all the equipment and materials. I specify how I want the work done and supervise her. She is an employee. It can get gray in between the two end points. And let’s not forget the business owner trying to save money and work by treating employees as if they had their own businesses.
Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) can be completed by the worker or business owner to clear up the gray areas. The completed form can be used by the business to document their classification decision. Or it can be submitted to the IRS and based on that information they will determine if the worker is an independent contractor or employee. The forms covers issues like who decides what work is done, when it’s done and how it’s done. Who provided the tools and materials? How is payment made, expenses reimbursed, what benefits are provided? Who is in control basically? Whoever makes the determination, the proper procedures for that classification (employee or contract labor) will need to be followed.
If the IRS is involved because the SS-8 was submitted to them or they initiated the investigation, there is a possibility that the business will have to go back pay the back taxes for the now employee. That’s why it’s better to get this right from the start.
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